U.S. patent application number 12/482153 was filed with the patent office on 2010-06-17 for method of operating a venture business.
This patent application is currently assigned to GOLDENEYE INTERNATIONAL, INC.. Invention is credited to Harold P. MINTZ.
Application Number | 20100153253 12/482153 |
Document ID | / |
Family ID | 40748648 |
Filed Date | 2010-06-17 |
United States Patent
Application |
20100153253 |
Kind Code |
A1 |
MINTZ; Harold P. |
June 17, 2010 |
METHOD OF OPERATING A VENTURE BUSINESS
Abstract
A method of operating a venture capital investment business,
comprising establishing a business entity; the business entity
establishing an investment fund; establishing a fund managing
entity of the investment fund, the fund managing entity attending
to administrative matters relating to the investment fund and
making investment decisions for the fund; the investment fund
having investors that provide capital contributions to the fund,
the fund managing entity also providing capital contributions to
the fund, the fund utilizing the contributions to invest in
portfolio entities; the investors receiving a general participation
interest in the fund, and the fund managing entity receiving a
carried interest in the fund; providing the investors that have
provided at least a threshold capital contribution to the fund with
stock rights in the business entity to enable such investors to
become shareholders in the business entity; the business entity
securing a portion of IPO shares that become available in the
portfolio entities; and the business entity enabling shareholders
thereof to purchase IPO shares that become available in the
portfolio entities.
Inventors: |
MINTZ; Harold P.; (Fort Lee,
NJ) |
Correspondence
Address: |
ROBERTS MLOTKOWSKI SAFRAN & COLE, P.C.;Intellectual Property Department
P.O. Box 10064
MCLEAN
VA
22102-8064
US
|
Assignee: |
GOLDENEYE INTERNATIONAL,
INC.
Fort Lee
NJ
|
Family ID: |
40748648 |
Appl. No.: |
12/482153 |
Filed: |
June 10, 2009 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
|
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09714619 |
Nov 17, 2000 |
7548880 |
|
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12482153 |
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Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 40/06 20130101;
G06Q 40/04 20130101; G06Q 99/00 20130101; G06Q 40/00 20130101 |
Class at
Publication: |
705/37 |
International
Class: |
G06Q 40/00 20060101
G06Q040/00 |
Claims
1. A method of operating a venture capital investment business,
comprising: establishing a business entity; the business entity
establishing an investment fund; establishing a fund managing
entity of the investment fund, the fund managing entity attending
to administrative matters relating to the investment fund and
making investment decisions for the fund; the investment fund
having capital contributions provided by investors in the fund, the
fund managing entity also providing capital contributions to the
fund, the fund utilizing the contributions to invest in portfolio
entities; the investors receiving a general participation interest
in the fund, and the fund managing entity receiving a carried
interest in the fund; providing the investors that have provided at
least a threshold capital contribution to the fund with stock
rights in the business entity to enable such investors to become
shareholders in the business entity; the business entity securing a
portion of IPO shares that become available in the portfolio
entities; and the business entity enabling shareholders thereof to
purchase IPO shares that become available in the portfolio
entities.
2-25. (canceled)
Description
BACKGROUND OF THE INVENTION
[0001] The present invention relates generally to the structuring
of a venture capital business, and more particularly, to one which
provides unique participation opportunities for investors.
[0002] Conventional venture capital is typically conducted by
establishing a venture capital or buyout fund in the form of a
partnership or limited liability company. Where the fund is set up
in the form of a partnership, it includes a general partner and
limited partner investors. Where the fund is set up in the form of
a limited liability company, or other business entity other than a
partnership, it typically includes a managing member and member
investors.
[0003] The general partner or managing member of the typical
venture capital fund is usually responsible for attending to the
day-to-day administrative functions associated with running the
fund. The investors provide the great majority (e.g., typically
about 95%-99%) of the capital that goes into the fund for the fund
to invest in various portfolio companies. The general partner or
managing member typically contributes a smaller amount (e.g.,
approximately 1%-5%). The general partner/managing member may earn
a carried interest (a percentage of the fund's profits from
successful investing) of typically about 20%. In addition, the
general partner, or a separate management entity, will be paid an
annual management fee (e.g., about 2% of the total capital
committed to the fund).
[0004] Although venture capital funds can potentially provide
significant returns to the fund investors, such returns are limited
to the performance/profits of the fund alone.
[0005] Venture capital may also be conducted in the form of a
corporation ("venture corporation") that makes direct investments
in companies. It has also been known for venture corporations to
establish and run a venture capital fund. These models are less
prevalent than the traditional fund approach.
[0006] From time to time, portfolio companies in which the fund or
venture corporation invests may become sufficiently successful to
have an opportunity to raise significant capital through an initial
public offering (IPO). Venture capital funds or venture business
entities that have invested in a company that is having an IPO may
have an opportunity to participate in the IPO via a Directed Share
Subscription Program (DSSP) or rights offering. Occasionally, when
a venture capital fund or venture corporation agrees to invest in a
portfolio company, the portfolio company may agree to lock up a
predetermined, disproportionate number of IPO shares in favor of
the venture capital company in the event that the portfolio company
is subject to an IPO.
[0007] From an investor's perspective, while many are interested in
participating in IPOs, access to the same has been primarily
limited to institutions and high net worth investors directly
invested in venture capital funds or having ties to large
underwriting institutions. While recently an assortment of venture
capital groups have gone public, the vast majority are still
traditional private funds inaccessible to the general public. The
typical private fund model requires a large initial investment with
a long lock up period (the period for which the investors are
prohibited from transferring or selling their interests). The lock
up period is typically for the life of the fund (usually a seven
year commitment), and there are substantial restrictions imposed
with respect to salability and transferability.
[0008] It is an object of the present invention to provide a method
of operating a venture capital investment business that provides a
unique opportunity for investors to participate in IPOs. In
accordance with this object, the present invention provides a
method of operating a venture capital investment business,
comprising establishing a business entity; the business entity
establishing an investment fund; establishing a fund managing
entity of the investment fund, the fund managing entity attending
to administrative matters relating to the investment fund and
making investment decisions for the fund; the investment fund
having investors that provide capital contributions to the fund,
the fund managing entity also providing capital contributions to
the fund, the fund utilizing the contributions to invest in
portfolio entities; the investors receiving a general participation
interest in the fund, and the fund managing entity receiving a
carried interest in the fund; providing the investors that have
provided at least a threshold capital contribution to the fund with
stock rights in the business entity to enable such investors to
become shareholders in the business entity; the business entity
securing a portion of IPO shares that become available in the
portfolio entities; and the business entity enabling shareholders
thereof to purchase IPO shares that become available in the
portfolio entities.
[0009] It is a further aspect of the invention for the fund
managing entity to have at least one other fund managing entity to
direct investment decisions for the fund, and to provide said at
least one other fund managing entity with stock rights in the
business entity to enable said at least one other fund managing
entity to become a shareholder in said business entity. Through
this vehicle, the at least one other fund managing entity can
purchase IPO shares that become available in the portfolio
entities.
[0010] It is a further aspect of the invention to provide such a
venture capital investment business wherein portfolio entities are
provided with stock rights in the business entity.
[0011] It is a further aspect of the invention to provide a method
of distributing stock rights, wherein capital contribution
information is received relating to an amount of capital
contributed by an investor to a fund, the fund having investments
in a portfolio entity; the capital contribution information is
compared to a threshold value; and consequent to said comparing,
stock rights in a business entity having stock rights in the
portfolio entity are assigned to the investor.
[0012] It is a further aspect of the invention to provide a data
storage medium having machine-readable code stored thereon, the
machine-readable code including instructions executable by an array
of logic elements, the instructions defining a method wherein
capital contribution information is received relating to an amount
of capital contributed by an investor to a fund, the fund having
investments in a portfolio entity; the capital contribution
information is compared to a threshold value; and consequent to
said comparing, stock rights in a business entity having stock
rights are assigned to the investor in the portfolio entity.
[0013] Other objects and aspects of the invention will become
apparent from the following description, drawings and claims.
BRIEF DESCRIPTION OF THE DRAWINGS
[0014] FIG. 1 is a diagrammatic representation of a venture capital
business in accordance with the principles of the present
invention;
[0015] FIG. 2 is a flowchart representing the software logic
employed in accordance with another aspect of the present
invention; and
[0016] FIGS. 3-5 are further flowchart representations of the
software employed in accordance with an aspect of the
invention.
DETAILED DESCRIPTION OF THE DRAWINGS
[0017] Illustrated in FIG. 1 is a diagrammatic representation of a
venture capital investment business, as generally indicated at 10,
in accordance with the principles of the present invention.
[0018] As illustrated in FIG. 1, a business entity 12 is
established. The business entity 12 makes stock and certain stock
rights available therein. In a preferred embodiment, the business
entity 12 is incorporated and is a public company. The business can
also be a limited liability corporation (L.L.C.), partnership,
trust, or other unincorporated organization. The stock rights
available in the business entity 12 are preferably stock options,
but may also be warrants, restricted stock grants, phantom stock
rights, stock appreciation rights, or other commonly accepted
rights to acquire shares or equity in the business entity 12.
[0019] As also shown in FIG. 1, an investment fund 14 is
established. A fund managing entity 16 of the investment fund 14 is
also established. The fund managing entity 16 attends to the
day-to-day administration and operations of the fund 14. In the
event that the fund 14 is established in the form of a limited
partnership (L.P.), then the fund managing entity 16 is a general
partner of the fund. In the event that the fund 14 is established
in the form of a limited liability corporation (L.L.C.) or other
type of business entity other than a partnership, then the fund
managing entity 16 is a managing member of the fund 14.
[0020] The fund 14 has investors 18 that provide capital
contributions to the fund 14. The investors 18 will be members of
the fund in the event that the fund 14 is established as a limited
liability corporation or other type of business entity other than a
partnership. The investors 18 will be limited partners of the fund
14 in the event that the fund 14 is established as a limited
partnership.
[0021] The fund managing entity 16 also provides capital
contributions to the fund 14. Approximately 95%-99% of the capital
contributions is received from the investors 18 and approximately
1%-5% is received from the fund managing entity 16, but these
percentages are preferred examples only. In a preferred embodiment,
the fund managing entity 16 receives the money to make its 1%-5%
contribution from the business entity 12.
[0022] Preferably, the fund 14 is set up as a partnership, with the
fund managing entity 16 being a general partner of the fund 14, and
the fund investors 18 being limited partners in a limited
partnership (L.P.) fund 14. Preferably, the general partner, fund
managing entity 16, is established in the form of a limited
liability corporation (L.L.C.), but can be any other organization
suitable to operate as the fund managing entity 16.
[0023] The fund 14 utilizes the capital contributions from the
investors 18 and the fund managing entity 16 to invest in portfolio
entities 20. The portfolio entities 20 are, for example, companies
or other business organizations that the fund 14 has determined to
be good investments. The fund managing entity 16 may employ at
least one other fund managing entity 26 to direct investment
decisions and manage the fund. This other fund managing entity 26
may be a person or business.
[0024] The investors 18 and fund managing entity 16 both receive an
earned percentage interest in the fund's profits from successful
investing. Specifically, the investors receive what is termed a
general participation interest in the fund. It is contemplated that
the general participation interest will preferably be a return of
capital, plus a preferred rate of return (e.g., between 7-9%, and
most preferably 8%), plus a pro-rata share (based on the relative
capital contributed) of about 80% of the fund's profits. The fund
managing entity receives a return of capital, plus what is termed a
carried interest or "carry" in the fund, which is typically about
20% of the fund's profits.
[0025] In accordance with the principles of the present invention,
the investors 18 that provide at least a threshold capital
contribution amount into the fund 14 will be entitled to receive a
portion of the stock rights in the business entity 12. For example,
in a preferred embodiment, limited partner investors 18 that invest
$1,000,000 or more in the fund 14 will be entitled to receive stock
options or warrants in the business entity 12. It is contemplated
that the threshold capital contribution will be based on a
requirement that the investor invest a predetermined amount of
money into the fund. While the threshold contribution of $1,000,000
noted above is preferred, this is exemplary only. Also, it is
contemplated that an investor 18 that invests as little as $100,000
may be entitled to stock rights.
[0026] It can be considered that the investors 18 that are
entitled' to stock rights in business entity 12 are receiving said
stock rights as a quid pro quo in partial consideration for
allowing the business entity 12 to secure the stock rights (e.g.,
DSSP rights) in the portfolio entities 12.
[0027] Typically, investors will commit or promise to invest a
certain amount of capital into the fund 14 in advance of the actual
payment. Preferably, the business entity 12 will commit to transfer
options to investors 18 to purchase a certain number of shares in
the business entity 12 at the same time that the investors 18
commit to making capital contributions. However, it is also
preferable that the options not be exercisable immediately and that
they be forfeited if the investor 18 does not fulfill its
contractual commitments. It is preferred that the options in the
business entity 12 vest only as the investors 18 make their capital
call contributions when called to do so by the fund managing entity
16. It is also preferred that the options vest on a pro-rata basis.
That is, the options will vest on a percentage basis in accordance
with the capital contributions actually made as a percentage of the
total commitment. It is also contemplated that the number of
options made available to individual investors 18 are commensurate
with the amount of capital committed into the fund 14.
[0028] Preferably, the options will have a predetermined duration.
That is, the investors 18 will be given a certain period of time to
exercise the options to purchase shares in business entity 12,
after which time the options will expire. The options will be
exercisable at a predetermined price. Preferably the option price
is established on the date that escrow is broken on the fund 14 and
will preferably be based on the fair market value of the business
entity 12 at that time.
[0029] In accordance with another aspect of the invention,
shareholders in the business entity 12, including those investors
18 that have become shareholders by virtue of exercising options
for which they have become eligible through meeting the threshold
investment amount in fund 14, will benefit from directed share
subscription programs (DSSPs) and/or rights offerings offered by
the business entity 12. Particularly, in accordance with one aspect
of the invention, in consideration of the fund 14 investing in
portfolio entities 20, the portfolio entities 20 will execute an
agreement committing that, in the event the portfolio entity 20 is
subject to an initial public offering (IPO), a certain portion of
the IPO shares will be made available (locked-up) in favor of the
business entity 12.
[0030] As a result, during a rights offering or DSSP, shareholders
in the business entity 12, including those investors 18 that have
become shareholders by exercising their options in the business
entity 12 through the fund 14, will become eligible to purchase
stock in a portfolio entity 20 subject to its IPO and at the IPO
price. Of course, other shareholders in the business entity 12 who
are direct shareholders (not through the fund 14) will also be
entitled to purchase IPO stock in a portfolio entity subject to an
IPO. Preferably, the shareholders in business entity 12 will be
permitted to purchase a certain percentage of the IPO shares made
available to the business entity 12 based upon a pro-rata
percentage ownership in the shares of business entity 12. It is
contemplated, however, that only shareholders that have at least a
threshold number or percentage of shares in the business entity 12
be eligible to purchase IPO shares in the portfolio entities 20. In
the event that certain shareholders are not eligible to participate
in an IPO or choose not to participate, it is contemplated that
those IPO shares will be offered on a pro-rata basis to the
remaining shareholders in the business entity 12, or may be given
to the underwriter of the IPO for it to offer.
[0031] Preferably, shareholders of record (e.g., direct
shareholders and option holders that have exercised their options
in business entity 12) at the time of the Securities and Exchange
Commission's initial IPO filing on behalf of a portfolio entity 20
will be entitled to participate in a given IPO.
[0032] As noted above, it is contemplated that the fund managing
entity 16 will employ at least one other fund managing entity 26 to
direct investment decisions for the fund 14. It is further
contemplated, in accordance with another aspect of the invention,
for such at least one other fund managing entity 26 to receive some
of the stock rights (e.g., options) in the business entity 12 at a
level to be negotiated. In one embodiment, the amount of stock
rights to which said at least one other fund managing entity 26 is
entitled to be granted is based upon the performance of the fund 14
and/or the tenure of the said at least one other fund managing
entity 26. The granted stock rights provide a vehicle through which
the investment decision maker can participate in the success of the
business entity 12 and also participate in any IPO that one of the
portfolio entities 20 is subject to. This is beneficial in that it
will help enable the business entity 12 to attract exceptional
personnel to manage the investment decisions for the fund 14.
[0033] In accordance with another aspect of the invention, the
portfolio entities 20 are also provided with stock rights in the
business entity 12 at a level to be negotiated. This will enable
the business entity to attract the most promising portfolio
entities 20, and enable portfolio entities 20 to participate in
IPOs of other portfolio entities that are within the fund 14 or a
family of funds controlled by the business entity 12.
[0034] It can be appreciated that, in accordance with one aspect of
the invention, the interests of a wide variety of stakeholders in a
distributed and integrated venture capital enterprise are
aligned.
[0035] It is further contemplated that the business entity 12 may
invest directly in additional portfolio entities 22, other than
those invested in through a fund.
[0036] It is further contemplated that an investment
manager/advisor 24 may provide investment advice to the fund 14,
and receive an annual management fee, preferably 2% of the
committed capital to the fund 14. This investment manager/advisor
24 is optional, as it is relevant in only certain jurisdictions
such as New York City to address certain issues, such as
organizational tax issues such as the unincorporated business tax.
Otherwise, the function of the investment manager/advisor 24 can be
performed by the fund managing entity 16. For the purpose of this
disclosure, the term "fund managing entity" includes the investment
manager/advisor 24 in the instance in which it is a separate
entity. In other words, the investment/advisor 24 can be considered
as being subsumed or part of the fund managing entity 16.
[0037] As also illustrated in FIG. 1, a second fund 30 (or several
funds) may also be established by the business entity 12. The fund
30 is run in the same manner as fund 14. Specifically, fund 30 is
managed by a fund managing entity 32 and has limited partner
investors 34. The fund 30 invests in portfolio business entities
36.
[0038] Business entity 12 controls what may be considered a family
of funds, including, but not limited to, funds 14 and 30.
[0039] In accordance with an aspect of the invention, investors 18
and 34 who have obtained stock rights in business entity 12 through
making a threshold minimum investment in the associated funds14 or
30, and have thereby subsequently become shareholders in business
entity 12, are able to participate in an IPO in any one of the
portfolio entities 20, 22 or 36, whether or not those entities 20,
22 or 36 have been invested in by the fund in which the investors
have invested. For example, investors 18 in fund 14 that have met
the minimum investment threshold will be entitled to participate in
the IPOs of portfolio entities 22 and 36, so long as they have
become shareholders in business entity 12 by exercising their stock
rights.
[0040] The principles set forth herein apply to both rights
offerings and DSSPs. During a rights offering, business entity 12
shareholders will receive rights (similar to call options) that
allow them to purchase stock in a portfolio entity 20 at the IPO
price. The DSSP program is a "partial" rights offering, wherein a
portfolio entity 20 is taken public to a combination of business
entity 12 shareholders and outside underwriters' books of business.
In the DSSP instance, it is contemplated that the business entity
12 shareholders will participate in the IPO according to their
ownership interests in the business entity 12 subject to the
percentage of the offering that is being distributed by the
underwriters. The DSSP has an advantage over rights offerings in
that it shares the wealth with underwriters and increases
distribution and post-IPO analyst coverage. Nevertheless, the
principles and advantages set forth herein apply to rights
offerings as well as DSSPs.
[0041] It is further contemplated that a method of distributing
stock rights as described herein may be practiced using one or more
computers, each computer including one or more processors or other
arrays of logic elements capable of receiving data and executing
instructions on the data. FIG. 2 shows a flowchart for a method
according to one embodiment of the invention. In act A200, capital
contribution information (CCI) is received. The CCI relates to an
amount of capital contributed to the fund by a particular investor.
In one example, the CCI indicates a total amount in U.S. dollars
that the investor has contributed or otherwise committed to the
fund.
[0042] FIG. 3 shows an exemplary implementation A202 of act A200.
In act A210, an investor identifier is received. For example, the
investor identifier may be entered by an operator at a keyboard or
may be received over a network or other communications link from a
remote operator, another computer, or another portion of a
computer. In such case, the investor identifier may be the name of
the investor or another string of symbols that identifies the
investor (e.g. an identification number). In another example, the
investor identifier may be a string of symbols produced by another
sequence of instructions (e.g. in response to an operator or other
input as described above). In act A220, the CCI is retrieved from a
storage element according to the investor identifier. For example,
the investor identifier may indicate a memory location or a
database entry where the CCI may be found. Alternatively, the CCI
may be retrieved according to the investor identifier in
conjunction with other information relating to the investor and/or
to the fund. For example, a fund identifier (which may be received
or produced in a manner similar to that described above for the
investor identifier) may also be used in retrieving the CCI.
[0043] In act A300, the CCI is compared to a predetermined
threshold amount. In one example, the comparison includes testing
the proposition that the CCI exceeds the threshold amount, although
in another example a different relation (i.e. the proposition that
the CCI is less than the threshold amount) may be tested instead.
If the comparison fails, the method may terminate with respect to
this particular investor and fund, although the method may continue
with respect to contributions by the investor to other funds and/or
contributions by one or more other investors to the fund.
[0044] If the comparison of act A300 succeeds, then in act A400
stock rights are assigned to the investor. In one example, a
predetermined amount of stock rights may be assigned to the
investor. Alternatively, stock rights may be assigned according to
an implementation A402 of task A400 as shown in FIG. 4. In act
A410, a total capital contribution amount (TCCA) is received. The
TCCA relates to a total amount of capital contributed to the fund
by all of the investors (or possibly by a selected set of
investors). In one example, the TCCA indicates a total amount in
U.S. dollars that the investors have contributed or otherwise
committed to the fund. In a manner analogous to the retrieval of
the CCI in act A202 as shown in FIG. 3 and described above, the
TCCA may be retrieved from a storage element according to a fund
identifier (e.g. as mentioned above).
[0045] In act A420, a relation between the CCI and the TCCA is
calculated, and in act A430 stock rights are assigned to the
investor according to the relation. In FIG. 5, an implementation
A404 of act A400 is described that includes implementations A422
and A432 of acts A420 and A430, respectively. In act A422, a stock
ownership percentage (SOP) is calculated based on the CCI and the
TCCA. For example, the SOP may be calculated as the percentage of
the TCCA that the CCI represents. In act A432, stock rights are
assigned to the investor according to the SOP. For example, a
percentage of stock rights that is equal to the SOP may be assigned
to the investor.
[0046] The foregoing specific embodiment has been provided to
illustrate the principles of the present invention and is not
intended to be limiting. To the contrary, the present invention is
intended to encompass all modifications, substitutions, and
alterations within the spirit and scope of the appended claims.
* * * * *